Working paper 799
The health consequences of smoking are serious and have been frequently detailed. A reduction in tobacco-related mortality hinges upon the ability to reduce tobacco usage. There is overwhelming evidence that higher cigarette prices reduce cigarettes demand, but little is known about the combined effect of price and non-price policies. This paper extends the analysis of price elasticities by estimating the effect of changes in price and non-price legislations in South Africa. Annual time-series data from 1961 to 2016 are used, with a policy index constructed to capture the instances of non-price tobacco legislation. The combined impact is estimated using a vector error correction model and a two-stage least squares (2SLS) model. The long-run own-price elasticities lie between -0.55 and -0.72, while the income elasticities lie between 0.39 and 0.49. The coefficients of the changing tobacco policies and changing market structure show that they contribute to a modest reduction in cigarette consumption. The short-run deviations from the steady state are presented using the error correction term. Cigarette demand is responsive to prices and non-pricing policies but failure to control for non-pricing policies overstates the price effect. This suggests that both prices and non-pricing legislation are effective in reducing cigarette consumption.
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